Making the Business Case for Sustainability

One data point in particular stands out for me in The Business of Sustainability report (produced by MIT Sloan Management Review and The Boston Consulting Group) that we reported on in January. It’s not that 92% of the more than 1500 executives surveyed said their company was “addressing sustainability in some way.” It’s not that nearly 75% say they have not reduced sustainability investment due to the recession.

It’s this: “More than 70 percent of respondents said their company had not developed a business case for sustainability.”

In fact, “the majority of sustainability actions undertaken to date appear to be those limited to those necessary for meeting regulatory requirements.” – which is far from a business case, and about as exciting – or as strategic – as flossing your teeth. It’s a good thing to do, a good defensive move, but hardly a path to adding value and enriching your life. Or your business.

Most companies won’t move without understanding the business case. And sadly, most people – whether in business, government, or NGOs – still assume that sustainability, environmental performance and social responsibility will inevitably cost money. The more optimistic assume it will at least cost money “in the short term”, while potentially adding value in the “long term”.

There are several problems with this perspective:
– It’s mired in the short term thinking that plagues modern business.
– It sees “sustainability” only as a cost, not an investment.
– It demands higher hurdle rates from sustainability investments than other investments.
– Like many assumptions, it blinds people to the facts. (I’ve had countless interactions where people literally couldn’t see the attractive ROIs on the page because they were so convinced that environmental improvement had to cost money.)

Also: it’s fundamentally wrong.

In our experience – based on Natural Logic’s strategic work with dozens of leading companies, efficiency assessments of hundreds of facilities, and tracking the work of many other companies and practitioners – there simply is no necessary conflict between sustainability performance and economic performance. In fact they often go hand in hand. As we say on the cover of The Truth About Green Business, “You don’t have to choose between making money and making sense.”

Why else would Henry Kravis, co-founder of private equity giant KKR (Kohlberg, Kravis Roberts & Co.), say, “The business case for environmental management has never been stronger”? (In fact, KKR just announced that it’s expanding its Green Portfolio Program to cover 20 percent of the companies in its portfolio.)

If you believe sustainability is a cost, a rational CFO will delay this investment as long as possible, and do only what is required by regulators. If you believe sustainability can add value, a rational CFO will accelerate this investment, and accelerate the harvest of value.
As I wrote in 2004 in “Risk, CFOs, and the Sustainability Business Case”, Dupont CFO Gary Pfeiffer understood this well, and thought that Wall Street did too:

Wall Street’s legendary focus on the short term… is more precisely a focus on discounted future cash flows. Wall Street is happy if a company will (a) make more money in the future; (b) make money sooner rather than later; and (c) face less risk that could reduce or delay the money they might make….
A and B argue for using sustainability perspectives to guide the invention of better products and services — ones that can profitably meet present and anticipated market needs, meet them sooner than the competition, and turn them profitable faster than the competition…
The third element, C, demands reducing the risks that could weaken that cash flow – barriers to market entry from future regulatory hurdles, missing shifting market expectations or competitor innovations, facing unanticipated calamities like Bhopal or fully anticipated ones like rising sea levels — is equally subject to management’s ability to see into that landscape.

Making the business case has to include three elements, in three dimensions. It has to:
– provide a good return on investment of money, time and brand;
– generate more value than other potential uses of that time and money; and
– do this in financial, operational and strategic dimensions.

“Indirect” returns, though not always easy to measure, can be worth more than tangible ones like energy savings. These include impacts on productivity and quality; on intangibles like brand (which can itself be worth much more than the book value of a company), employee perceptions (which impact recruitment and retention), customer and analyst perceptions, and a host of other factors typically left out of financials. They may hard to monetize, but smart companies rarely make decisions only on the numbers, so at least list the intangibles, and include them in strategic discussions.

It’s critical to consider risk as well as benefit. Volatile times demand that companies “factor the future” into these assessments, with explicit consideration of risk in the sustainability business case. For example, the prospect of rising energy prices should be an explicit factor in considering the risk and determining the net present value (NPV) on any investment. Do you expect oil prices to hover around $70/barrel, drop significantly, or settle above $100 — or even $200/barrel? What could be the impacts on your cost structure – or supply chain – of dramatic changes in energy prices, or even availability? How can you design a portfolio of strategies that “future-proof the company” by diversifying your risk going forward?

What other “inevitable surprises” await? Changing regulations – or customer expectations – at home or aboard? Financial crises? Rising sea levels? Competitive innovation eating your lunch? You can’t predict “the” future, but you had better be prepared for possible futures.

Adequate consideration of these risks is part the fiduciary duty of business leadership, and directors and executives at many companies (as we argued in the Wall Street Journal in 2005) are needlessly exposed – especially since these avoidable risk often hold significant business opportunities, not just cost avoidance.

But here’s a deeper question about the “business case”: How do you use it? To determine what you should do? Or how to do it?

The numbers can’t tell you what you should do. They can only tell you how well you’re doing it – and perhaps help you make and defend the case, and sometimes help you recognize and evaluate opportunities.

As to what you should do, you already know the answer: You should look to your core purpose, your reason for being, and do what you – and your business – are really here to do. (But that’s a matter for a future article.)

A “business case” is not substitute for insight, leadership and courage. “If you try to anticipate every possible use for new business models,” says Creative Commons CEO Joi Ito, “it won’t work. You have to allow for applications that are hard to predict, locally driven, and full of weirdness.” And you have to make decisions, commit capital and sometimes bet the farm on worlds that are still coming into being, and futures that no-one can predict.

The question is not “Can you find a viable business case for the carbon-constrained world that is rapidly heading your way?” The question is “How can you create one?” Because you will find one, create one or die.

Challenging enough for you? If not, let me remind you of Bill Gates’ astute observation:
“If you can show me the business case, you’re too late.”

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I’d be remiss if I didn’t point out that Natural Logic’s Full Cycle Sustainability™ program can help you cut thru this “lack of business case” problem, starting with a one day strategic briefing with your senior team – a frank dialog in which your leadership and ours will:

share our respective views of your business landscape and the sustainability trends you face;

examine the business case for embedding sustainability into your core business goals; and

lay the foundation for sound, profitable business strategy that will deliver those results.